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of total program payments. We are inclined to agree that such construction of the terms of the agreements is a reasonable one. However, in light of legal requirements and problems which would arise should the corps costs exceed the 5.5-percent limitation, we believe that another interpretation to which the agreements are susceptible would be preferable; namely, that the Department was responsible for reimbursement of all costs, recognizing that the corps is obligated to utilize its best efforts to hold such costs to the 5.5 percent stipulated.
Mr. WRIGHT. Now, you are recommending that another agreement be entered into, legitimatizing the interpretation to which Mr. Socolar has said the existing agreement may be subject. Sort of a cost-plus operation. But you have concluded that it is clear that the corps and the Department-in this case, now the Service-both consider this to be an absolute ceiling.
Mr. STAATS. That is correct.
Mr. WRIGHT. So, if both parties to the contract construe it to be an absolute ceiling, it is in effect an absolute ceiling, is it not?
Did you not say earlier, Mr. Socolar, that the interpretation of the meaning of the contract would depend upon the intent of the parties to the contract?
Mr. SOCOLAR. Yes.
Mr. WRIGHT. And Mr. Staats, you have concluded that the corps and the Department apparently regard this to be an absolute ceiling. Therefore, if we conclude that both parties considered it an absolute ceiling, does that not cast some light upon the present contractual agreement between the two?
Mr. SOCOLAR. It casts an element of doubt. However, in terms of the ultimate legality of the agreement, in this regard, I don't think that we could take the position of assuming or perhaps guessing that the 5.5 percent will, in fact, be exceeded as long as
Mr. WRIGHT. No. Of course, we hope it isn't exceeded.
Mr. SOCOLAR. Right.
Mr. WRIGHT. But I think the General Accounting Office as well as this congressional committee have some question in their minds that it may be exceeded. Else there would be no occasion for all this conversation.
Mr. SOCOLAR. I think that here again I would like to interject the point that what we are saying here relates to the period before July 1, rather than after.
Mr. WRIGHT. Yes. Well, now, we are in a period after July 1, and I think primarily what the committee would be basically interested in is what happens now. Thank you.
Mr. STAATS. If I may say so, there will be a problem certainly from the standpoint of our responsibilities with respect to the agreements entered into prior to July 1.
Mr. WRIGHT. A legal problem.
Mr. STAATS. A legal problem which we will have to be concerned with, and which will require close observation by our office.
Mr. WRIGHT. Thank you.
Mr. STAATS. So long as the corps stays within the 5.5 percent, there would of course be no problem under either interpretation. However, should the corps cost significantly exceed the 5.5-percent figure, it
will be faced with the situation of having improperly used its appropriations for Postal purposes. However, we are not inclined to attempt to forecast such a result or to hold that such a possibility renders use of the 5.5 percentage rate, even as a ceiling, as being contrary to law. Mr. CONSTANDY. I have been very troubled over this. We had a number of conversations. Yesterday I suggested I was in agreement with this. Since I said that to Mr. Ahart yesterday, I have still been troubled over it. I have to say for myself on the record that I don't agree with you. I recognize what you are saying, but it strikes me-where I have difficulty in accepting what you said the first rationale is predicated on the reasonableness of the figure, isn't it, on the 5.5 percent?
Mr. SOCOLAR. Yes.
Mr. CONSTANDY. The material which has preceded this in the record suggests it may not be a reasonable figure.
Mr. SOCOLAR. Yes. All that I think we are suggesting here is that while it may not be a reasonable figure, without our being able to establish at this point what the reasonable figure is, we really cannot attack the bona fides of that figure until perhaps such time as the facts prove it unreasonable.
Mr. CONSTANDY. OK. I can accept that. What troubles me is that maybe I believe the corps more than you do. I accept it when they say their past experience, as their own documentation of this shows, is better than 8 percent. I think Mr. Ahart was going to bring out another factor that perhaps we should consider, an even 8 percent rather than 8.51. But I would accept their past experience was that. I will even accept the fact that that includes projects of a different nature perhaps. That may cause it to be somewhat in excess.
But in the February 12 brochure, they address themselves purely to the types of things they would be doing for the Post Office and produced a range of 5.5 to 6.98. Again, there may be the subsequent adjustment and provision for the design work being done in-house, which would add another half percent, but we are then looking at the lower end of the spectrum in any case, and on their best rationale of what they think they can do it for, during the negotiations proceding the March 11 agreement, they were strong for considering that simply a target rather than a ceiling.
All of that taken together suggests to me, without even considering some of the difficulties they are already running into, that they will have an exceptionally difficult time meeting the 5.5 percent.
Now, connected with one other thing which I think relates to the consideration of it after July 1, the impression I had of the Economy Act was to prevent situations like this from developing by providing for the agency that would be doing the work to be reimbursed on an actual cost basis. Now, part of your rationale is really an attempt to avoid getting picayune. You consume more money in auditing than you do in the program at some point. But doesn't this construction of the Economy Act induce a reduction in the services to the detriment of the work? In other words, if staying within the 5.5 percent becomes a critical factor and the corps recognizes that there will be no source of funds beyond the 5.5 percent, and if they accept the fact that they are precluded from dipping into other funds to make up the difference, it seems logical to me that their be
havior thereafter will be reasonable if they begin to diminish services that they are performing.
I think that gets to the essence of the Economy Act, to preclude an organization like the corps to do less than
Mr. SOCOLAR. I agree with everything you said in terms of the wisdom of this procedure, or the rationale for going into it. However, in terms of coming up with an absolute determination that this agreement is legally unauthorized in the face of the corps' expressed commitment and statement to the effect that it will not exceed 5.5 percent, and not being in a position to state-at least from the information that I have reviewed-that I know it will exceed 5.5 percent, I simply don't feel I can come to the conclusion that stating the 5.5 percent as a ceiling is illegal. There will be problems if they exceed it.
Mr. CONSTANDY. I am not so troubled with your explanation, but may I read something from General Rebh who commands the unit that will be performing the work, in a memo dated March 19, 1971, this being addressed to his subordinates in the field who will be accomplishing the work. He begins by addressing the fact under part 4:
Differentiating Features of this Program. There are several features which differentiate this program from other major Corps programs.
He speaks under section (a) of the single interface. While I hate to take the time, I think it does
Mr. SOCOLAR. I am familiar with it.
Mr. CONSTANDY. I would like it reflected in the record. Under section (b), he says:
U.S. Post Office Department is Profit and Loss Oriented.
I don't think that can be excluded or stressed sufficiently either, in the course of our hearing.
When the U.S. Post Office Department becomes the U.S. Postal Service on 1 July 1971, it will be a Government corporation operating on self-produced revenues. Bonds sold on the open market will provide for long term financing needs, including construction. The acceptance of these bonds in the open market will depend largely upon the Post Office Department's "profit and loss" status. Timely and high quality design and construction at reasonable prices will be essential to both the technical and financial success of the expanded modernization program. This profit and loss approach has at least two principal impacts on the Corps' operations.
He then gives one which we can ignore for the moment and two which gets to be pertinent here:
Adherence to established schedules will also be a matter of continuing concern to the U.S. Post Office Department. Because of the significant savings generated by the substitution of modern, large facilities for less efficient ones, time is money. As a result, the Post Office Department wants to be consulted, to a degree in excess of what is normal for the Corps and its other programs, at important milestones, and when project costs and schedule changes are in the offing.
I hope I read that right.
As a rule, the U.S. Post Office wants to be consulted to a degree in excess of what is normal for the Corps and its other programs at important milestones and when project costs and schedule changes are in the offing.
The U.S. Post Office Department will be operating on a marginal cost-marginal revenue concept. Therefore, on occasion time extensions and design and construction schedule considerations will be overridden by the requirement of the Post Office Department to bring the facility "on-stream" by a certain date. Operational dates, once established for facilities, will be tantamount to fixed dates because of the extensive coordination required on a nationwide basis throughout the entire Postal system to achieve redirection of the mail to the new facility. Now, we have to go over to page 5. This is titled under subsection (1) of E, "Ceilings on Corps In-House Design and Construction Costs."
I quote again:
Throughout the negotiations of the Post Office Corps agreement, the Postmaster General was firm in his desire to ensure that the Corps' in-house costs are controlled. The Agreement provides for a Corps in-house cost ceiling of 5.5 percent of the aggregate of contract awards for design, and construction, and mechanization on a program basis. While this percentage may be exceeded for a single project, it may not be exceeded on a program basis, since there are no other funds available to cover the costs which exceed this rate, and the Post Office Department will not fund costs above this rate. Accordingly, costs will have to be managed closely. In some respects, this is a new approach to Corps' costs.
That is kind of a strange sentence by itself. They will have to manage the cost carefully and "In some respects this is a new approach to corps' costs."
Heretofore, we have always provided every service to the degree we felt neecssary and accepted the resulting cost, concentrating our management on improving the efficiency and cost-effectiveness in the provision of those services. The agreement with the Post Office Department adds a new dimension to the cost problem, now, we must also insure that the quality, the quantity and degree of services do not exceed the allowable cost, while, at the same time, insuring that there is no decrease in quality of engineering and construction or responsiveness to Post Office Department requests. This will pose a new challenge to all of us. General Clarke considered that this commitment could be made based on Corps historical experience, the downward trend in Corps in-house costs, the fact that we can control the services to be provided, and the US. Post Office Department commitment of a minimal annual program of $250 million and the furnishing of projected schedules 6 months in advance of the requirement for the Corps services.
Now, as far as "E" under it, there will be no money above the 5.5 percent, I think it is fair to say, and he was implicit in that statement the suggestion that they are only going to get 5.5 percent worth of services.
Now, if you begin with the fact that certain services are required in the performance of their work and there is a limit to how much money they are going to spend to get them, as he suggests, they will control services in order to stay within the costs, which brings me back to where I started, that this interpretation of the Economy Act seems to me to induce a reduction in the services to the possible detriment of the work. Either the services are needed, or they are not. If they are not needed, they shouldn't be providing them. If they are, there is nothing left to control.
That is my own impression of it. With that, I conclude.
Mr. STAATS. You are speaking to the problem that would arise should the five and a half percent have to be exceeded in order to provide the services.
Mr. CONSTANDY. I am really speaking to the advisability of permitting them to begin the venture with a fixed ceiling.
Mr. STAATS. But the question is whether it is a policy or legal question.
Mr. CONSTANDY. You have me there. I can't make the distinction. Mr. SOCOLAR. There is another aspect. I agree with the general import of the point that you are making. However, in the course of constructing these projects, it is also reasonable, I think, to interpret what is being said there as moving ahead on these projects with perhaps some different trade-offs than the corps is traditionally accustomed to making. For example, as you go forward with a particular project, you are also making trade-offs. You have to decide whether any delay that you incur in terms of the benefit that you are going to receive for that delay are worth the delay, and I think that perhaps what is being said there is the cost of these things is going to have to be more closely adhered to than we might have done in the past.
Mr. CONSTANDY. I couldn't myself afford to take the view that on the balance of the billion-six that they are doing in civil work that they are not addressing themselves to the conservation of costs anyhow, leaving out the military end of it. They have been in business since 1804. I don't think that they are viewing this in such a way that it took them until 1971 to do the postal work that they are now going to address themselves to the conservation of funds. I would assume they have attempted to develop the best services as are required in each project and for minimal costs.
The other suggestion is that they are kind of free-wheeling when it comes to programs other than the Post Office, and I couldn't accept that.
Mr. STAATS. It is complicated by the fact that the 512 percent is an average concept, rather than applying to each individual project also.
Mr. CONSTANDY. You mean against the program rather than the project?
Mr. STAATS. Yes.
Mr. CONSTANDY. Even taking that, that rationale was developed in connection with the March 11 agreement. The March 11 agreement confined itself only to major facilities over 50,000 square feet, and they were placing very heavy reliance on the fact that on major buildings overhead costs are lower. This has to be interpreted in the light of the May 20 agreement which provides for their undertaking not just the medium-sized projects in addition, not just the smallsized projects in addition, but anything.
Until they have made some other provision for overhead costs, and I assume in some of these other services they will be reimbursed for actual costs—they would have to be-but I am not sure the inclusion